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Practice Exam Problem

Zazzy Company reported the following information for the year 2018:

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Zazzy Company

Income Statement

For the Period Ended December 31, 2018

Sales

$636,000

Cost of Goods Sold

240,000

Gross Profit

396,000

Office Expenses

242,000

Depreciation Expense

9,000

Income from Operations

145,000

Interest Expense

0

Income before Income Tax

145,000

Income tax expense

120,000

Net Income

$25,000

     Zazzy Company

        Comparative Balance Sheets

                 December 31, 20XX

2018

2017

Assets:

Cash and cash equivalents

$84,000

$48,700

Accounts Receivable

53,600

50,000

Inventory

39,600

39,000

Prepaid Expenses

5,500

15,000

Equipment

206,000

200,000

Accumulated Depreciation - Equipment

(126,700)

(117,700)

      Total assets

$262,000

$235,000



Liabilities:


Accounts Payable

$48,000

$49,000

Accrued Liabilities

44,000

42,000

Stockholders' Equity:

Common Stock

10,000

9,000

Retained Earnings

160,000

135,000

       Total Liabilities & S/H Equity

$262,000

$235,000

 

Additional information:


1.    No equipment was sold throughout the year, so the change in accumulated depreciation is a result of depreciation expense for the year.

2.    Stock was issued for cash.

3.    Equipment was purchased with cash.


Please explain:


1.    Help explain a FULL statement of cash flows for the year 2018, including the Operating, Investing and Financing sections, assuming that Zazzy Company uses the

INDIRECT method.

2.    Can a company have a positive cash flow and negative income? What about positive income and negative cash flow? Explain your answer.




Practice Problem Part B



Help explain the FULL Statement of Cash Flows for Zazzy Company for the year 2018, assuming they use the DIRECT method.

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